ConAgra Foods Q1 Profit Tops Estimates

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The FINANCIAL — On September 22 ConAgra Foods, Inc., (NYSE: CAG) reported results for the fiscal 2016 first quarter ended August 30, 2015.

Highlights (% cited indicates change vs. year-ago amounts, where applicable. SG&A refers to selling, general, and administrative expense, and COGS refers to cost of goods sold)

Diluted EPS from continuing operations as reported was $0.38, compared to $0.22 in the year-ago period. After adjusting for items impacting comparability, diluted comparable EPS of $0.45 this quarter exceeded $0.39 in the year-ago period.

Consumer Foods posted strong operating profit growth and more than 250 basis points of comparable margin improvement through a combination of favorable price/mix and increased productivity.

Commercial Foods posted good sales and operating profit performance, primarily due to strong volumes, favorable mix, and efficiencies for Lamb Weston.

The divestiture process for the private label operations is proceeding as planned, and the company expects to have an announcement on the outcome of this process later this fall. The company recognized a large impairment charge for the private label operations, based on preliminary estimates, in connection with the reclassification of this business into assets held for sale.

CEO Perspective:

Sean Connolly, chief executive officer of ConAgra Foods, said, “We are off to a strong start in fiscal 2016. While early days, we are making good progress against our plan to drive margin improvement within a more focused portfolio. In the near-term, we expect to grow profits modestly in fiscal 2016 across the Consumer Foods and Commercial Foods segments by building on the stronger foundations established last fiscal year, with an emphasis on improving price/mix and implementing relentless cost discipline.”

“Our entire organization is focused on delivering long-term top- and bottom-line improvement. Rigorous portfolio segmentation work and improving innovation capabilities should benefit our top line over time, and we are in the midst of developing aggressive cost savings plans to drive improved SG&A, trade spend efficiency, and COGS. We are confident in our ability to unlock long-term value as we execute our plans to become a leaner, more focused company.”

Overall Quarterly Results

For the fiscal 2016 first quarter ended August 30, 2015, diluted earnings per share from continuing operations were $0.38 as reported, vs. $0.22 for the first quarter of fiscal 2015. After adjusting for items impacting comparability, comparable diluted EPS was $0.45 this quarter and $0.39 in the year-ago period. Items impacting comparability are summarized toward the end of this release and reconciled for Regulation G purposes starting on page 10.

The private label operations have been reclassified as discontinued operations given the company’s plans to exit this business, and there is no longer a Private Brands segment. In connection with the pending divestiture, the company has also moved small amounts across segments, and this has slightly altered historical presentation of results.

Consumer Foods Segment

Branded food items sold worldwide in retail channels.

The Consumer Foods segment posted sales of approximately $1.7 billion and operating profit of $242 million, as reported. Sales were flat as reported, with flat volume, a 2% benefit from price/mix, and 2% unfavorable impact of foreign exchange (all rounded).

In fiscal 2016, the Consumer Foods segment is focused on continuing to strengthen its core business by emphasizing its highest-potential brands, focusing on the most promising sales channels, expanding margins, and getting more brands ready for stronger marketing support in the future. The segment is showing early progress.

Brands posting sales growth for the quarter include Chef Boyardee, Egg Beater’s, Hebrew National, Hunt’s, Marie Callender’s, Orville Redenbacher’s, PAM, PF Chang’s, Reddi-wip, Ro*Tel, Rosarita, Slim Jim, Swiss Miss, and Wolf.

Other brand details are in the written Q&A document accompanying this release.

Segment operating profit was $242 million versus $193 million in the year-ago period, as reported. After adjusting for $7 million of net expense in the current quarter and $10 million of net expense in the year-ago period from items impacting comparability, current quarter operating profit of $248 million increased 22% over comparable year-ago amounts. Advertising investment increased $5 million, or 7%. Comparable operating margin increased more than 250 basis points, reflecting the benefit of better price/mix as well as good productivity. The impact of foreign exchange negatively impacted profitability, while commodity inflation was not material this quarter.

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Commercial Foods Segment

Specialty potato, seasonings, blends, flavors, and bakery products, as well as consumer branded and private label packaged food items, sold to restaurants, foodservice and commercial channels worldwide.

Sales for the Commercial Foods segment were $1.1 billion, ahead of $1.1 billion (rounded) a year ago, and operating profit was $139 million, ahead of $119 million a year ago, as reported. Sales for Lamb Weston’s potato operations grew globally, with domestic growth outpacing international growth. International sales are on track to return to normal levels in fiscal 2016 following the impact of the West Coast port labor dispute that was resolved last fiscal year. Sales for the rest of the segment were in line with year-ago amounts.

Segment operating profit grew 17% as reported and 13% after adjusting for items impacting comparability. All major business lines in the segment posted comparable profit growth. Lamb Weston made the most significant contribution to the segment’s profit increase, reflecting its strong sales performance, favorable mix, and operating efficiencies from good raw potato crop quality.

Hedging Activities

Hedge gains and losses are generally aggregated, and net amounts are reclassified from unallocated Corporate expense to the operating segments when the underlying commodity or foreign currency being hedged is expensed in segment cost of goods sold. The net of these activities resulted in $2 million of net expense in the current quarter and $33 million of net expense in the year-ago period. The company identifies these amounts as items impacting comparability within the discussion of unallocated Corporate results.

Other Items

Unallocated Corporate amounts were $85 million of expense in the current quarter and $115 million of expense in the year-ago period. Current-quarter amounts include $2 million of hedge-related expense and $11 million of expense from other items impacting comparability. Year-ago period amounts include $33 million of hedge-related expense and $24 million of net expense related to other items impacting comparability. Excluding these amounts, unallocated Corporate expense was $72 million for the current quarter and $58 million in the year-ago period.

Equity method investment earnings were $37 million for the current quarter and $26 million in the year-ago period; the year-over-year increase mostly reflects the inclusion of a full quarter’s profits for the Ardent Mills joint venture (only two months of activity were included in the year-ago amounts).

Net interest expense was $80 million in the current quarter and $83 million in the year-ago period.

Capital Items

The company is committed to an investment grade debt rating, and plans a balanced approach to capital allocation in fiscal 2016, including further debt reduction, repurchasing shares as market conditions warrant, and a top tier dividend. The company will assess opportunities to increase the dividend after it is further along with the strategic plan outlined at the end of fiscal 2015.

Dividends for the quarter totaled $107 million versus $105 million in the year-ago period.

The company did not repurchase any shares during the quarter.

For the current quarter, capital expenditures for property, plant and equipment were $108 million, compared with $90 million in the year-ago period. Depreciation and amortization expense was approximately $92 million for the fiscal first quarter; this compares with a total of $96 million in the year-ago period.

Discontinued Operations:

Discontinued operations (currently the private label operations) posted a loss of ($3.23) per diluted share this quarter, reflecting a significant impairment charge related to the reclassification of assets as held for sale. After adjusting for this charge, the private label operations earned $0.04 per diluted share this quarter. Expected earnings from the private label operations were included in the company’s previously issued guidance.

Discontinued operations in the first quarter of fiscal 2015 contributed $0.90 per diluted share as reported and $0.08 per diluted share after adjusting for items impacting comparability. The largest item impacting comparability for that period was a gain related to Ardent Mills; the fair value of the company’s interest in Ardent Mills exceeded the carrying value of the former ConAgra Mills assets contributed in the formation of that entity.

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The company notes that because the private label operations are now classified as assets held for sale, there will no longer be any depreciation or amortization expense for these assets. Due to timing, this change had a slight benefit in the current quarter and should have a larger benefit in subsequent quarters.

Outlook

The company will offer more details on fiscal 2016 EPS guidance once it is further along with the process of divesting the private label operations, determining associated SG&A reduction targets, and finalizing investment levels for the remaining segments. The company expects the Consumer Foods and Commercial Foods segments to post modest comparable operating profit growth for the full fiscal year.

With regard to the second quarter of fiscal 2016, the company expects diluted EPS, adjusted for items impacting comparability, to be approximately in line with year-ago comparable amounts. Despite strong fundamentals and expectations for continued margin expansion, comparable operating profits for the Consumer Foods segment in the fiscal second quarter are expected to be negatively impacted by foreign exchange, as well as a planned increase in marketing investment. Profits for the Commercial Foods segment are expected to post an increase in profitability year-over-year in the fiscal second quarter. Expected contribution from the private label operations, which are now in discontinued operations, is included in this guidance. As previously mentioned, results from the private label operations will benefit from the absence of depreciation and amortization.

As announced on June 30, 2015, the company is focused on the divestiture of the private label operations, as well as on creating long-term value by:

Aggressively reducing costs, with an increased focus on SG&A and the elimination of stranded costs once the sale of the private label operations is complete,

Growing consumer brands (Consumer Foods segment) and Lamb Weston (within the Commercial Foods segment), as well as

Balanced capital allocation.

These plans are still being developed, and the company will offer long-term financial expectations about these plans in due course.

Major Items Impacting First-quarter Fiscal 2016 EPS Comparability

Included in the $0.38 diluted EPS from continuing operations for the first quarter of fiscal 2016 (EPS amounts rounded and after tax):

Approximately $0.02 per diluted share of net expense, or $17 million pretax, related to restructuring charges. $10 million of this is classified within unallocated Corporate expense (all SG&A) and $7 million is classified within the Consumer Foods segment ($4 million COGS/$3 million SG&A).

Note: Comparable EPS contribution from the private label operations, now classified as discontinued operations, was approximately $0.04 per diluted share. Contribution from the private label operations was included in original guidance. The $0.04 per diluted share excludes an impairment charge of $3.27 per diluted share, or $1.95 billion pretax. These amounts are shown as part of the Regulation G reconciliation on page 10.

Included in the $0.22 diluted EPS from continuing operations for the first quarter of fiscal 2015 (EPS amounts rounded and after tax):

Approximately $0.05 per diluted share of net expense, or $33 million pretax, related to the mark-to-market impact of derivatives used to hedge input costs, temporarily classified in unallocated Corporate expense. Hedge gains and losses are generally aggregated, and net amounts are reclassified from unallocated Corporate expense to the operating segments when the underlying commodity or foreign currency being hedged is expensed in segment cost of goods sold.

Approximately $0.04 per diluted share of net expense, or $25 million pretax, related to extinguishing debt. This is classified within unallocated Corporate expense.

Approximately $0.02 per diluted share of net expense, or $16 million pretax, resulting from restructuring activities. $10 million of this is classified within the Consumer Foods segment ($8 million COGS/$2 million SG&A), $4 million within the Commercial Foods segment (all SG&A) and $2 million within unallocated Corporate expense (essentially all SG&A).

Approximately $0.01 per diluted share of net benefit, or $2 million pretax, related to historical legal matters, a portion of which is not taxable, within unallocated Corporate expense.

 

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